Smith Manoeuvre – Convert your mortgage to tax deductible interest

This article was written for The TaxLetter, a subscription newsletter for accountants and tax specialists. It discusses the tax implications of the Smith Manoeuvre strategy in depth.

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The best article on the internet about the Smith Manoeuvre is also on this site. It is an exceptional strategy for building wealth and having the life you want, but with risks you must understand.

Read also: “The Smith Manoeuvre – Is your mortgage tax deductible?“.



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  1. Ed Rempel on January 26, 2020 at 8:35 PM

    Hi MKS,

    Your instincts are right, in that you are trying to make the entire debt for your rental property tax-deductible.

    It is smart to 100% finance a rental property when you can, including the down payment which cannot be part of the mortgage. This gives you the maximum tax deduction, plus it gives you a clear picture of how profitable your rental is.

    I meet people with a lot of equity in a property thinking it is profitable just because it is positive cash flow. For example, a $500,000 property with a $250,000 mortgage with positive cash flow of $500/month and paying $500/month mortgage principal. That is a $12,000 gain on $250,000 of your capital, or a 4.8% return. Low.

    For your question, to make the $30,000 tax-deductible, you have to take the position with CRA that you borrowed $30,000 from April-August for a purchase in November.

    If there was a short time span, it might be reasonable. For example, your intention was to finance it, but you took the $30,000 from your chequing because the financing was in progress.

    In your case, you would be setting up the financing 3-8 months after paying out the cash. Trying to argue that it was all in process for that long is a weak argument.

    Tax is not always black and white. This is one of those areas where you could try including the $30,000 in your mortgage and hoping CRA does not ask. If they do, you make your case that your intention was to leverage and for practical reasons, you could not get the financing in place until November when you take possession.

    CRA may well disagree with you and can easily argue your position is unreasonable.

    Technically, this is not really tax deductible, but if you include it in your mortgage, you will have lawyers papers to show how much of a mortgage you took on the purchase. It might fly.

    You can make this up with a bit of time using the Cash Dam, so it’s not a total loss. There is usually a maximum you can borrow against a property and you can get there without including this $30,000.

    I hope that is helpful, MKS.


  2. mks1010 on November 12, 2019 at 1:11 PM

    Hi Ed,

    – i booked a investment rental property with builder and paid $30k in installments between April-August 2019, from checking account from which i make mortgage payments for primary residence.
    – Now i have refinanced and Heloc set-up for my primary residence in November 2019.
    – Can i withdraw 30K from Heloc, for retroactively pay for the 30K i invested earlier in the year?
    – my concern is i used my general use checking account for investment., would that cause any issue as far as tracking of transactions is concerned.
    – i also want to same HELOC account to pay for rest of the down for this rental property and Cash Dam going forward. For that i plan to have separate checking account for HELOC withdrawals.

  3. Ed Rempel on July 28, 2018 at 12:19 AM

    Hi nhr594,

    CRA looks for good tracing of the expenses you Cash Dam and being reasonable. They do not every say exactly what reasonable is, but in my opinion, Cash Damming the current year since January should be fine.

    I have some clients that only do the Cash Dam transactions once each year for simplicity.

    Hope that helpful, nhr!


  4. nhr594 on July 24, 2018 at 1:45 PM

    Hi Ed,

    Starting up on Cash Damming in August. Wondering if it’s okay to retroactively pay for the rental expenses (principle, interest, condo fees, tax etc) starting Jan 2018 by transferring the lump sum amount from HELOC. Or do you recommend just starting from this month?


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